RBI to promote new Gold schemes to deter physical demand

India is the world's largest gold consumer and it is estimated that about 10% of the world's gold is in India's possession.

NEW DELHI(BullionStreet): Following government's measures to curb rising gold demand, India's central bank also suggested different ways to moderate the demand for gold imports.

According to the draft report of a panel constituted by the RBI, there is a need to moderate gold import as the insatiable appetite for the yellow metal could jeopardize economic stability.

The working group set up by the RBI to study issues related to gold imports and gold loans by NBFCs, said financial products designed to provide returns equivalent to that of the precious metal could divert investors from buying gold, it said.

"These products will, if designed properly, help to monetise a portion of the privately held stock of gold as well as financialise the incremental demand for gold," it said.

Policymakers are rattled by the soaring gold demand, which has widened the current account deficit to a record 5.4% of the GDP, it said. Investors have been chasing it as other investments, including equities and fixed deposit returns , turned adverse.

Gold contributes to nearly 30% of the trade deficit. During 2002-2012 , annual gold demand has remained relatively stable at about 700 to 900 tonnes.

To divert people's attention from buying gold, the panel has suggested various financial savings products.

"There is a need for banks to introduce new gold-backed financial products that may reduce or postpone the demand for gold imports," it said.

"Awareness would play an important role in popularizing these instruments." Instruments like gold accumulation plan, gold inked account, modified gold deposit and gold pension could be considered for investment.

The challenges for these products would be to offer higher returns and provide adequate liquidity. The group, chaired by K U B Rao, suggested setting up of a gold corporation or gold bank as a ‘backstop facility’ to provide refinance to institutions lending against gold.

Gold imports rose as people used it as a hedge against inflation, it found. According to it, the gold bank or corporation could be empowered with activities related to gold policies, make official purchases and sales of gold, issue gold bonds and collect gold stocks.

The committee suggested allowing exchange-traded funds to invest their gold holdings in gold certificates with banks and that the modalities could be worked out with the capital markets regulator.

The impact on gold imports, however, would depend on various factors, which could either lead to an increase in demand or a reduction in gold imports, the RBI said. Attempts to control consumption could lead to black-marketing .

India is the world's largest gold consumer and it is estimated that about 10% of the world's gold is in India's possession. Accumulated gold stock in India is around 18,000 to 19,000 tonnes as per independent estimates.